The capital plans of 30 of the largest bank holding companies in the U.S. recently passed muster in the Federal Reserve in its latest round of stress testing, but the U.S. arms of two international banks proved repeat offenders.
“Over the six years in which [Comprehensive Capital Analysis and Review] has been in place, the participating firms have strengthened their capital positions and improved their risk-management capacities,” Governor Daniel K. Tarullo said in a statement announcing the results. “Continued progress in both areas will further enhance the resiliency of the nation’s largest banks.”
But Cornelius K. Hurley, director of Boston University’s Center for Finance, Law & Policy, said the tests also reflect a shift in the Fed’s own role, from supervisor of banks to custodian of banks.
“When you’re a supervisor, you can call banks out for deficiencies. When you’re their custodian, you’re equally responsible for their deficiencies. And when you call them out, you’re also calling yourself out, saying that you as a custodian fell down on the job,” he said. “Put another way, if one of these banks was deficient, materially deficient, one would have expected to have been brought to the public’s attention way before these annual stress tests. This is just an update on the whole class.”
In faulting the capital plans of the U.S. arms of Deutsche Bank Trust Corp. and Santander, the Fed cited “broad and substantial weaknesses across their capital planning processes, and insufficient progress these firms have made toward correcting those weaknesses and meeting supervisory expectations.”
Consequently, those bank holding companies will not be able to pay dividends back to their parent companies overseas until they address those deficiencies. This is the third year Santander’s U.S. bank has failed the Fed’s test of its capital plan and the second year that Deutsche Bank has failed.
The financial impact on Santander and Deutsche Bank are not that great, but the reputational damage is considerable, Hurley said, especially for Deutsche Bank, which has been besieged in recent years over a variety of issues, including mortgage securities and LIBOR manipulation.
In a statement, CEO Scott Powell highlighted the bank holding company’s Common Equity Tier 1 ratio of 12 percent at year-end 2015. He said that would decline to a minimum of 11.9 percent during the horizon forecast and that “according to the Federal Reserve’s estimates, all of SHUSA’s regulatory capital ratios would remain significantly above the required minimums incorporated in CCAR.”
“Our results confirm that Santander Holdings USA has strong capital levels that are well above the required minimums. We have made progress, but our internal capital planning, stress testing, internal controls, governance and oversight require further improvement to meet our regulators’ expectations,” he said. “We are financially sound. These results do not affect our ability to serve our customers.”
The bank said that it is already preparing for next year’s stress test and that it anticipates it will meet regulators’ expectations then.
The Fed also issued a conditional non-objection to Morgan Stanley’s plan, meaning that it must address those weaknesses regulators found with its plan and submit a new capital plan by Dec. 29.
“Do I think this proves the banks are healthier? I think the banks are healthier, but these tests don’t prove that. You can just look at their call reports and see that they’re more highly capitalized, they’re less leveraged, they’re more liquid,” Hurley said. “But it’s not the stress test that makes them healthier.”
